The Tale of Two Crises (re The Economist)

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Subject: The tale of two crises (re The Economist)
Date: Thu, 20 Nov 2014
From: Ben Aris <baris@bne.eu>

I would like to comment on two sets of pieces you ran from the Economist on eastern European woes on JRL#241.

I know I keep taking pops at the Economist and I try not to as I don’t have anything against it per se (I spent years working for the company, and I am grateful as they taught me a great deal). But it’s a scab you cant help picking at as the magazine has a big blind spot when it comes to Russia and Ukraine.

The two pieces are: Ukraine’s economy, It is really that bad; and The Russian economy, A wounded economy (It is closer to crisis than the West or Vladimir Putin realise) which was on the cover.

Both describe crises but the tone is notably different.

In Ukraine’s case the country is actually in the middle of a crisis. GDP will contract this year by about 9%, inflation is running at 20%, the UAH has devalued by 50% and it has $14bn of debts to pay, but only just over $12bn in reserves.

In Russia’s case the economy is actually growing by about 1% but it might go into recession, maybe. We are not sure. Depends on what happens to oil… Inflation has risen and is an uncomfortably high 9%, the RUB has devalued by 23% and it has $130bn in external debt to pay with $340bn of reserves (whereas the CBR’s official estimate of reserves remains $420bn).

So Russia’s economy is not doing well, but that hardly looks like a crisis. Indeed, the good news like the “small” $50bn trade surplus, expected to reach $90bn by the end of the year by Alfa Bank – and almost as much as estimates of this year’s capital flight – is part of the country’s triple trade, current account and budget surpluses – pretty much the only major economy in the world to be in this happy situation. The Economist’s own sister publication the EIU asked this week: “When has any country every had a currency crisis when it is running a triple surplus?”

As for “everybody expects continued stagnation,” well, firstly the economy is still actually growing, albeit slowly, which is not true for many countries in the CIS and western Europe, which are already in, or about to go into recession. And secondly it is not true. The EU expects some growth next year as do some of the investment banks. Russia could of course do a lot better if it had made those reforms, but didn’t and is kinda business rebuilding its army in the meantime. But there are many better candidates to accuse of teetering on the brink of recession than Russia in Europe these days..

Set this against, Ukraine’s economy’s “contraction” expected to be 9% this year. “Contraction”. Really? Is that right word? In 2008-2009 when Russia’s economy “contracted” by 7% we called it a full blown meltdown/crisis/catastrophe and whatever else we could find in the Thesaurus under “really really bad.” Of all the choices on offer the Economist went with “slow motion car crash.”

Still, reading the two pieces and you come away with the impression that while Ukraine is clearly in a bad way, lots of people seem to want to give it money if can sort itself out.

Whereas, reading the Russian one and you come away with, things are not particularly brilliant but it could all go wrong if something goes wrong.

“In fact, a crisis could happen a lot sooner,” in Russia, thereafter offering no facts explaining how this crisis could actually happen soon other than a vague “succession of possibilities: another dip in the oil price, a bungled debt rescheduling by Russian firms, further Western sanctions.”

To remind: oil fell to under $40 in 2009 and Russia survived, and using a fixed exchange rate, unlike now with the floating rate which gives the economy a lot more flexibility. A repeat of $40 oil would do it, but the piece predicts oil will fall to $83 -which while painful would still lead the govt with only a small deficit. It has a 2% surplus now, unlike Ukraine which already has a deficit of 4.8% of GDP.

A “bungled debt restructuring?” But Russia has enough cash to pay off all its debts twice over. Moreover, half of the external debt is owed by Rosneft and Gazprom, which are both exporters earning revenues in hard currency and so able to pay their own debts out of cash-flow.

Sanctions could bring the house down that is true — but then Angela Merkel said again only this week before the Wednesday night deadline “no new sanctions are planned.”

To finish my favourite sentence was this one: “When economies are on an unsustainable course, international finance often acts as a fast-forward button, pushing countries over the edge more quickly than politicians or investors expect.” It is in the Russian article but got lost as it should have been in the Ukraine one and wasn’t. More seriously it is the Ukraine piece that should have been on the cover as that is already in a real crisis and no one is doing anything to stop it, whereas the Russian crisis is nothing more than wishful thinking on St James’ Square part.

Ben Aris
editor
bne.eu

Map of Ukraine, Including Crimea, and Neighbors, Including Russia Map of Commonwealth of Independent States, European Portion

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